Tonka by niusheng11

VIEWS: 308 PAGES: 15

									                                          Industry Trends and Business Risk


                                                                             Kenner
                                       Coleco             Hasbro             Parker     Mattel    Tonka
Year over year change in Sales
      1983                             16.87%             63.45%                 n/a   -52.80%     8.26%
      1984                             29.91%            218.99%            365.25%     39.07%    58.31%
      1985                              0.14%             71.54%             -1.51%     19.30%    75.83%
      1986                            -35.48%              9.02%            -21.23%      0.74%    20.05%


Sales                                   500.70           1,344.70            502.80    1,058.70   293.40
Long-term debt                          307.90             125.00             99.60      297.50     8.20

Debt to sales                          61.49%              9.30%             19.81%     28.10%    2.79%



Sales and profits are volatile due to the cyclical nature of the industry

Demand is subject to sharp changes in consumer sentiment

Demand is significantly influenced by demographic changes and levels of disposable income

Toys have a very short lifespan
                                     Pro Forma Capitalization Alternatives


                                                                20% Debt/      40% Debt/     60% Debt/
                                              Actual           80% Equity     60% Equity    40% Equity
Book Value of Debt                        16,700,000            22,600,000     45,200,000    67,800,000
Book Value of Equity                      96,300,000            90,400,000     67,800,000    45,200,000
Book Value of firm                       113,000,000           113,000,000    113,000,000   113,000,000

Market Value of Debt                      16,700,000            22,600,000     45,200,000    67,800,000
Market Value of Equity                   155,500,000           152,200,000    139,800,000   127,400,000
Enterprise Value                         172,200,000           174,800,000    185,000,000   195,200,000

Pretax Cost of Debt                            9.50%                 9.50%         9.50%         9.50%

Tax rate                                      45.00%                45.00%        45.00%        45.00%

After-Tax Cost of Debt                         5.23%                 5.23%         5.23%         5.23%

Market Value Weights of
 Debt                                         9.70%                 12.93%        24.43%        34.73%
 Equity                                      90.30%                 87.07%        75.57%        65.27%
 Debt -to-Equity                                0.11                   0.15          0.32          0.53
Unlevered Beta                                 1.039                  1.039         1.039         1.039
Levered beta                                   1.100                  1.123         1.223         1.343
Risk-Free Rate                                7.30%                  7.30%         7.30%         7.30%
Expected Return on S&P 500                   14.00%                 14.00%        14.00%        14.00%
Market Premium                                6.70%                  6.70%         6.70%         6.70%
Cost of Equity                               14.67%                 14.83%        15.50%        16.30%
Weighted-Average Cost of Capital             13.75%                 13.59%        12.99%        12.45%
EBIT                                      44,100,000             44,100,000    44,100,000    44,100,000
 Taxes (@ 45%)                            19,845,000             19,845,000    19,845,000    19,845,000
EBIAT                                     24,255,000             24,255,000    24,255,000    24,255,000
+ Depreciation                            34,100,000             34,100,000    34,100,000    34,100,000
 Capital Exp.                            -34,100,000            -34,100,000   -34,100,000   -34,100,000
Free Cash Flow                            24,255,000             24,255,000    24,255,000    24,255,000

Value of Assets (FCF/WACC)               176,348,423           178,532,040    186,765,550   194,810,877

Return on equity (ROE)                        15.60%                15.94%        17.35%        19.04%

Degree of Financial Leverage (DFL)             1.094                  1.097         1.137         1.244
                                                Breakdown of Cash Flows




                                                                         20% Debt/     40% Debt/         60% Debt/
                                                        Actual          80% Equity    60% Equity        40% Equity
Cash Flow to Creditors:
 Interest                                            1,586,500            2,147,000     4,294,000        6,441,000
Pretax Cost of Debt                                     9.50%                9.50%         9.50%            9.50%
Value of Debt (CF/rd):                              16,700,000           22,600,000    45,200,000       67,800,000


Cash Flow to Shareholders:
 EBIT                                               44,100,000           44,100,000    44,100,000       44,100,000
 Interest                                           -1,586,500           -2,147,000    -4,294,000       -6,441,000
 Pretax Profit                                      42,513,500           41,953,000    39,806,000       37,659,000
 Taxes (@ 45%)                                      19,131,075           18,878,850    17,912,700       16,946,550
 Net Income                                         23,382,425           23,074,150    21,893,300       20,712,450
 + Depreciation                                     34,100,000           34,100,000    34,100,000       34,100,000
  Capital Exp.                                     -34,100,000          -34,100,000   -34,100,000      -34,100,000
Residual Cash Flow                                  23,382,425           23,074,150    21,893,300       20,712,450

Cost of Equity                                          14.67%               14.83%       15.50%            16.30%

Value of Equity (CF/re)                           159,389,400          155,619,558    141,279,629      127,102,697

Value of Equity plus Value of Debt                176,089,400          178,219,558    186,479,629      194,902,697


Now, solving for the price per share may seem impossible, because we are dealing with two unknowns—share price and
change in the number of shares:

          Share       Total Market
          Price =      Value of Equity
                    (Original - Repurchased
                     Shares Shares)

But by rewriting the equation, we can put it in a form that can be solved:

  Share      Total Market    Cash
  Price = Value of Equity + Paid Out
          # Original Shares

Assume that all the new debt is equal to the cash paid to repurchase shares.

                                                                         20% Debt/     40% Debt/         60% Debt/
                                                        Actual          80% Equity    60% Equity        40% Equity

Total Market Value
   of Equity                                      159,389,400          155,619,558    141,279,629      127,102,697
Cash Paid Out                                               0            5,900,000     28,500,000       51,100,000
# Original Shares                                   7,670,000            7,670,000      7,670,000        7,670,000
Total Value Per Share                                   20.78                21.06          22.14            23.23
                                 Breakdown of Value



                                                  20% Debt/        40% Debt/     60% Debt/
                                    Actual       80% Equity       60% Equity    40% Equity
Pure Business Cash Flows:
 EBIT                            44,100,000       44,100,000       44,100,000    44,100,000
 Taxes (@ 45%)                   19,845,000       19,845,000       19,845,000    19,845,000
 EBIAT                           24,255,000       24,255,000       24,255,000    24,255,000
 +Depreciation                   34,100,000       34,100,000       34,100,000    34,100,000
  Capital Exp.                  -34,100,000      -34,100,000      -34,100,000   -34,100,000
 Cash Flow                       24,255,000       24,255,000       24,255,000    24,255,000

Unlevered Beta                        1.039               1.039         1.039         1.039
Risk-Free Rate                       7.30%               7.30%         7.30%         7.30%
Expected Return on S&P 500          14.00%              14.00%        14.00%        14.00%
Market Premium                       6.70%               6.70%         6.70%         6.70%
Unlevered WACC                      14.26%              14.26%        14.26%        14.26%

Value of Pure Business Flows:
(CF/Unlevered WACC)             170,103,666      170,103,666      170,103,666   170,103,666

Financing Cash Flows
 Interest                         1,586,500           2,147,000     4,294,000     6,441,000
 Tax Reduction                      713,925             966,150     1,932,300     2,898,450

Pretax Cost of Debt                   9.5%                9.5%          9.5%          9.5%

Value of Financing Effect:
(Tax Reduction/Pretax Cost of     7,515,000       10,170,000       20,340,000    30,510,000
 Debt)

Total Value (Sum of Values of   177,618,666      180,273,666      190,443,666   200,613,666
 Pure Business Flows and
   Financing Effects)
                                             FRICT Analysis




              20% Debt / 80% Equity          40% Debt / 60% Equity                  60% Debt / 40% Equity

Flexibility   High                           Moderate                               Low
              High reserves                  Medium reserves                        Low reserves




Risk          Low                            Medium                                 High
              Interest Coverage = 4.98X      Interest Coverage = 3.18X              Interest Coverage = 2.24X




Income        Low                            Moderate                               High
              DCF value per share = $21.06   DCF value per share = $22.14           DCF value per share = $23.23




Control       Covenants not restrictive      Covenants moderately restrictive       Covenants highly restrictive




Timing        Low risk                       Medium risk                            High risk
              Low equity multiples           Interest rates lower in recent years   Interest rates are historically high
                                                                                    and trending lower
                                                  FRICT Analysis




              20% Debt / 80% Equity          40% Debt / 60% Equity                  60% Debt / 40% Equity

Flexibility   High                           Moderate                               Low
              High reserves                  Medium reserves                        Low reserves

Risk          Low                            Medium                                 High
              Interest Coverage = 4.98X      Interest Coverage = 3.18X              Interest Coverage = 2.24X

Income        Low                            Moderate                               High
              DCF value per share = $21.06   DCF value per share = $22.14           DCF value per share = $23.23

Control       Covenants not restrictive      Covenants moderately restrictive       Covenants highly restrictive

Timing        Low risk                       Medium risk                            High risk
              Low equity multiples           Interest rates lower in recent years   Interest rates are historically high
                                                                                    and trending lower
                                                   Self-sustainable Growth


                                          Actual      20% Debt / 80% Equity    40% Debt / 60% Equity   60% Debt / 40% Equity
DuPont Analysis
Sales (S)                            293,400,000                 293,400,000            293,400,000             293,400,000
Profits (P)                           22,300,000                  21,900,000             20,700,000              19,500,000
Assets (A)                           176,348,423                 178,532,040            186,765,550             194,810,877
Equity (E)                           159,389,400                 155,619,558            141,279,629             127,102,697
ROE = P/S * S/A * A/E                    13.99%                      14.07%                 14.65%                  15.34%

Financial Leverage Equation
Return on total capital (ROTC)           13.99%                      14.07%                  14.65%                  15.34%
Cost of debt (Kd)                         9.50%                       9.50%                   9.50%                   9.50%
Debt-to-Equity (D/E)                        0.11                        0.15                    0.32                    0.53
ROE = ROTC + [(ROTC - Kd) * (D/E)]       14.47%                      14.75%                  16.32%                  18.45%

Balance Sheet ROE
ROE = Net earnings / Equity              15.60%                      15.94%                  17.35%                  19.04%

Dividend Payout Ratio                     2.24%                       2.24%                   2.24%                   2.24%

Self-sustainable growth
DuPont ROE                               13.68%                      13.76%                  14.32%                  15.00%
Financial Leverage Equation              14.15%                      14.42%                  15.95%                  18.04%
Balance Sheet ROE                        15.25%                      15.58%                  16.96%                  18.61%
UVA-S-F-0811 version 1.5


              This spreadsheet supports student analysis of the case, "An
              Introduction to Debt Policy and Value" (UVA-F-0811 v. 1.5).


   Revised: 12-Dec-01
   Copyright: Darden Graduate Business School Foundation, Charlottesville VA.
                Current                  Investor       Competitor        Internal
                Structure                View           View              View
Mix             low D/E; highly liquid   passive        weak              conservative
Maturity
Basis
Currency         USD                     indifferent    ?                  conservative
Exotica          none                    conservative   unsophisticated    conservative
External Control                                        takeover candidate
Distribution
Evaluation
Comments
increase debt


no change
no change
Now, solving for the price per share may seem impossible, because we are dealing with two unknowns—share
price and change in the number of shares:


          Share       Total Market
          Price =      Value of Equity
                    (Original - Repurchased
                     Shares Shares)


But by rewriting the equation, we can put it in a form that can be solved:


  Share      Total Market    Cash
  Price = Value of Equity + Paid Out
          # Original Shares



Assume that all the new debt is equal to the cash paid to repurchase shares.


                                                                 20% Debt/      40% Debt/      60% Debt/
                                                  Actual        80% Equity     60% Equity     40% Equity

Total Market Value
   of Equity                                159,389,400         155,619,558    141,279,629    127,102,697
Cash Paid Out                                         0           5,900,000     28,500,000     51,100,000
# Original Shares                             7,670,000           7,670,000      7,670,000      7,670,000
Total Value Per Share                             20.78               21.06          22.14          23.23
7. As a way of illustrating the usefulness of the M&M theory and consolidating your grasp
  of the mechanics, consider the following case and complete the work sheet. On March 3,
  1988, Beazer Plc., a British construction company, and Shearson Lehman Hutton, Inc. (an
  investment banking firm), commenced a hostile tender offer to purchase all the outstanding
  stock of Koppers Company, Inc., a producer of construction materials, chemicals, and
  building products. Originally the raiders offered $45 per share; subsequently the offer was
  raised to $56, and then finally $61 per share. The Koppers board generally asserted that
  the offers were inadequate and its management was reviewing the possibility of a major
  recapitalization.

To test the valuation effects of the recapitalization alternative, assume that Koppers could borrow
a maximum of $1,738,095,000 at a pretax cost of debt of 10.5 percent and that the aggregate
amount of debt will remain constant in perpetuity. Thus, Koppers will take on additional debt of
$l,565,686,000 (I.e., $1,738,095,000 - $172,409,000). Also assume that the proceeds of the loan
would be paid as an extraordinary dividend to shareholders. Exhibit 1 presents
 Koppers' book- and market-value balance sheets assuming the capital structure before recapitalization.
 Please complete the work sheet for the recapitalization alternative.



                   Exhibit 1

        AN INTRODUCTION TO DEBT POLICY AND VALUE

             Koppers Company, Inc.


                                                               Before
                                                      Recapitalization                  Change

Book Value Balance Sheets
Net working capital
Fixed assets
Total assets

Long-term debt
Deferred taxes, etc.
Preferred stock
Common equity
Total capital

Borrowing rate

Market-Value Balance Sheets
Net working capital
Fixed assets
PV debt tax shield
Total assets

Long term debt
Deferred taxes, etc.
Preferred stock
Common equity
Total capital

Number of shares
Price per share


Value to Public Shareholders
Cash received
Value of shares
Total
Total per share
s of the loan

ore recapitalization.




                                   After            Before                            After
                        Recapitalization   Recapitalization     Change     Recapitalization


                                                  212,453                         212,453
                                                  601,446                         601,446
                                                  813,899                         813,899

                                                  172,409     1,565,686          1,738,095
                                                  195,616                          195,616
                                                   15,000                           15,000
                                                  430,874     -1,565,686        -1,134,812
                                                  813,899              0           813,899

                                                   10.50%       10.50%             10.50%


                                                  212,453                         212,453
                                                1,618,081                       1,618,081
                                                   58,619       532,333           590,952
                                                1,889,153       532,333         2,421,486

                                                  172,409     1,565,686         1,738,095
                                                        0                               0
   15,000                   15,000
1,701,744   -1,033,353     668,391
1,889,153      532,333   2,421,486

  28,128                   28,128
   60.50



        0   1,565,686    1,565,686
1,701,744                  668,391
1,701,744                2,234,077
    60.50                    79.43

								
To top